It adopted new statutory anchors and debt-GDP ratios
for the Central government and general (Centre and states) government on the suggestion of the N.K.
Small changes in large programs can have a significant effect on future debt-GDP ratios. Only three programs--Social Security, Medicare, and Medicaid--constitute 51 percent of total federal spending.
Even while the deficit is relatively low, it is not low enough to lower the debt-GDP ratio significantly.
If interest rates remain near today's unusually low levels for several years and all else remains equal, it is difficult to argue that the country faces a very serious long-run budget problem, because the debt-GDP ratio would be put on a declining path.
The fiscal risks created by interest rates can only be reduced by reducing the debt-GDP ratio. Options for doing that will be considered later in this article.
To reinforce this point we construct bar diagrams with median debt-GDP ratios and median growth rates for different sub-periods in Figure 2.
As growth declines, debt-GDP ratio rises, so the causality may run from low growth to high debt-GDP ratios.
For example, high public debt could be used to improve schooling which is found to have a larger positive impact on growth than the estimated negative impact of public debt-GDP ratios. Public debt to enhance government capacity and capabilities (measured by size of government) or to improve infrastructure can also positively contribute to growth and outweigh the potential adverse impact of high initial debt-GDP ratios.
The country has long coped with similar debt-GDP ratios
for some 20 years after profligate government spending in the 1980s.
In the next section we develop and estimate a simple macroeconomic model to determine the effects of monetary, fiscal, and exchange rate policies, on foreign debt and debt-GDP ratios of Costa Rica, El Salvador, Guatemala, and Honduras.
We may then identify the appropriate policy mix to be used to achieve acceptable levels of foreign debt and debt-GDP ratios.
This indicates that devaluation of the national currency led to a reduction in foreign debt and debt-GDP ratios by increasing exports and decreasing imports.